Govt imposes record fines on banks, brokerages for bond bid-rigging

South Korea’s antitrust regulator has imposed a record 1.62 trillion won ($1.22 billion) in fines on 15 banks and securities firms for colluding in government bond auctions, triggering threats of legal action from financial institutions and concerns over potential disruption to the sovereign debt market.

The Korea Fair Trade Commission (KFTC) announced Wednesday that it would impose corrective orders and fines totaling 1.62 trillion won on 10 brokerages and five banks for coordinating bids in government bond auctions.

The penalty is the largest ever imposed by the regulator in a single case, surpassing the 1.03 trillion won fine levied against Qualcomm in 2016.

The KFTC also said it would refer seven institutions for criminal investigation: Mirae Asset Securities, NH Investment & Securities, KB Securities, Kiwoom Securities, Korea Investment & Securities, Industrial Bank of Korea and Korea Development Bank.

The seven were singled out for their lengthy involvement in the scheme and the large number of auctions in which they allegedly colluded.

Government bonds are issued to finance public spending, and higher yields at auction translate into greater interest costs for the government, potentially increasing the burden on taxpayers.

Only designated financial institutions, known as primary dealers (PDs), are authorized to participate in competitive government bond auctions. According to the KFTC, 15 of the 18 primary dealers operating during the period were involved in the scheme.

The regulator found that traders routinely exchanged bidding information through telephone calls and messaging services between January 2020 and June 2023.

In one exchange, a trader said, “I‘ll go with 70,” and a counterpart replied, “Yes, 70.” The two reached an understanding on a 3.70 percent yield in just five seconds.

The practice was sufficiently entrenched that employees passed competitors’ contact information to their successors and prepared internal bidding guidelines.

Those instructions called for checking the proposed yields of at least five competing firms 15 minutes before an auction and confirming them again five minutes before bidding.

Kim Geun-seong, a standing commissioner at the KFTC, said any decision to suspend or revoke the institutions’ primary dealer status would fall under the jurisdiction of the Ministry of Finance and Economy.

The penalized financial institutions strongly disputed the regulator’s findings and indicated they would challenge the sanctions in court.

They argued that primary dealers have limited influence over market interest rates because government bonds are subsequently traded in a secondary market where domestic and foreign investors independently determine prices.

The institutions also challenged the calculation of the fines, saying the regulator treated the face value of bond purchases as revenue despite a lack of evidence of specific financial harm or corresponding profits.

A financial industry official questioned whether information sharing intended to prevent losses while performing a public market-making function should be classified as collusion.

“The PD system, which has supported the government bond market for more than 25 years, is now at risk of collapse because of these sanctions,” the official said.

The dispute has raised concerns that the unprecedented penalties could discourage financial institutions from participating in government bond auctions, potentially weakening liquidity and market stability.